Could the CFPB Change the Rules on Arbitration Clauses?

Of the 87 studies required by the Dodd Frank Act, one may get a bump up the priority list thanks to the recent U.S. Supreme Court decision in CompuCredit v. Greenwood, which upheld the rights of companies to include mandatory arbitration clauses in their user agreements. Several consumer groups disagreed with the court’s ruling and are calling on the new Consumer Financial Protection Bureau (CFPB) to get involved sooner rather than later. Section 1028 of Dodd Frank directs the CFPB to conduct a study and report to Congress on restricting mandatory pre-dispute arbitration, however, Congress set no deadline for completing the study. Once the CFPB does complete the study, the bureau has the authority to “prohibit or impose conditions or limitations” (via regulation) on arbitration agreements. The bureau’s rules must be consistent with the study.

The National Consumer Law Center (NCLC) recently issued a release protesting the court’s decision and pressing the CFPB to get started on the study. “The Supreme Court decision makes it all the more urgent for the Consumer Financial Protection Bureau to stop companies from using forced arbitration clauses to hide from the law,” said the group’s managing attorney Lauren Saunders. Saunders added, “Forced arbitration puts a thumb on the scales of justice in favor of predatory lenders...”

There are also bills in Congress that would amend the Federal Arbitration Act so that pre-dispute arbitration agreements would be invalid and unenforceable if they concern disputes related to employment, consumers, or civil rights. The Arbitration Fairness Act of 2011 (S. 987), sponsored by Sen. Al Franken (D-MN), asserts that mandatory arbitration clauses were “intended to apply to disputes between commercial entities of generally similar sophistication and bargaining power,” not consumers. Rep. Hank Johnson (D-GA) is sponsoring companion legislation (HR 1873) in the House. Both bills are sitting in their respective judiciary committees and not expected to move any time soon in this contentious election year. FRW is watching the CFPB for the next move.


Cordray Controversy Continues

Following President Obama’s January 4th announcement that he would install former Ohio Attorney General Richard Cordray as director of the Consumer Financial Protection Bureau (CFPB) using a recess appointment, a hailstorm of controversy has ensued, as lawyers, legislators and industry question the legitimacy of the move – and look for ways to undermine it.


Following the appointment, the Office of Legal Counsel stated that Congress can only prevent the president from making such appointments “by remaining continuously in session and available to receive and act on nominations,” not by holding pro forma sessions.

Senate Republicans, led by Sen. Chuck Grassley, Ranking Member of the Senate Judiciary Committee, accused the president of ignoring more than 90 years of legal precedent in making the recess appointments while the Senate remained in pro forma session. “The Justice Department and the White House owe it to the American people to provide a clear understanding of the process that transpired and the rationale it used to circumvent the checks and balances promised by the Constitution,” Grassley said. “Overturning 90 years of historical precedent is a major shift in policy that should not be done in a legal opinion made behind closed doors hidden from public scrutiny.” The letter was signed by Senate Judiciary Committee members Grassley, Sen. Orrin Hatch (R-UT), Sen. Jon Kyl (R-AZ), Sen. Jeff Sessions (R-AL), Sen. Lindsey Graham (R-SC), Sen. John Cornyn (R-TX), Sen. Mike Lee (R-UT), and Sen. Tom Coburn (R-OK).

On January 12, the Department of Justice issued a memo arguing that pro forma sessions held every third day in the Senate do not constitute a functioning body that can render advice and consent on the president’s nominees. It said the president acted consistently under the law by making the appointments. “Although the Senate will have held pro forma sessions regularly from January 3 to January 23, in our judgment, those sessions do not interrupt the intrasession recess in a manner that would preclude the president from determining that the Senate remains unavailable throughout to ‘receive communications from the president or participate as a body in making appointments,’” Virginia Seitz, assistant attorney general for the Office of Legal Counsel, wrote in the memo dated Jan. 6.


On the legislative front, there are two issues: the legislation that created Dodd-Frank, and the countless bills that will soon be introduced in response to the president’s recess appointment.

The conventional wisdom in both industry and government circles has been that the CFPB’s authority will be limited until it has a director, and that once it has a director, it will assume its full powers. Not quite. As Dodd-Frank was drafted, Section 1066 reserves many of the bureau’s powers for the Secretary of the Treasury “until the Director of the Bureau is confirmed by the Senate.” As Cordray was appointed through a recess appointment, rather than the Senate confirmation process, he will still have certain constraints on his authority. Specifically, the section transfers consumer financial protection functions of several other federal agencies to the CFPB Director.

In the absence of a Senate-confirmed director, those powers, which include the authority to regulate non-banks, should, according to statute, remain with the Secretary of the Treasury. Despite this, the CFPB has announced that it has launched its non-bank supervision program. Should that supervision become enforcement, it remains to be seen whether enforcement actions could withstand a court challenge.

Where the current legislation has raised questions, two freshman House Republicans are making moves to answer them.

On January 10, Rep. Diane Black (R-TN) introduced a House resolution “Disapproving of the President's appointment of four officers or employees of the United States during a period when no recess of the Congress for a period of more than three days was authorized by concurrent resolution and expressing the sense of the House of Representatives that those appointments were made in violation of the Constitution.” The resolution has 70 Republican co-sponsors.

On January 13, Rep. Jeff Landry (R-LA) introduced the Executive Appointment Reform Act (EARA), which would eliminate loopholes in the U.S. Code that allow for the payment of certain recess appointed individuals and also place limitations on an appointee’s ability to provide voluntary or gratuitous service. Additionally, the legislation would prevent all regulations hailing from the CFPB from becoming final until the director has been confirmed by the Senate. The bill has 22 Republican co-sponsors.


While few expected industry to enter the fray, a few major players have spoken out. 
Citigroup said that it does not view the move as a recess appointment and said it expects a court challenge. The U.S. Chamber of Commerce, a vocal critic of the bureau, has not ruled out a lawsuit, but said Friday, “We are not going to sue today.”

Cordray has said that he is working closely with industry leaders and lobbyists to ensure that their concerns are heard. “What I want to say to business is: They should embrace the bureau,” he said. “Not only are we going to protect consumers, but we are going to support the honest and responsible businesses in the financial marketplace” who were undercut by companies that did not “adhere to the same standards.”

The White House has held firm that the move was constitutional. “The Senate has effectively been in recess for weeks, and is expected to remain in recess for weeks,” White House spokesman Eric Schultz said in a statement. “Gimmicks do not override the president’s constitutional authority to make appointments to keep the government running,” he said.

Despite Republican Objections, Obama Installs Cordray as CFPB Director

President Obama announced this afternoon that he will install Former Ohio Attorney General Richard as director of the Consumer Financial Protection Bureau by “recess appointment.” The recess appointment comes despite the fact that the Senate is not officially in recess. The appointment will almost certainly be challenged in court.

Speaking in Shaker Heights, Ohio, the president said “Today I’m appointing Richard as America’s consumer watchdog. That means he’ll be in charge of one thing: looking out for the best interests of American consumers. His job will be to protect families like yours from the abuses of the financial industry.” The president went on to criticize Senate Republicans for blocking Cordray’s confirmation. “The only reason Republicans in the Senate have blocked Richard is because they don’t agree with the law setting up the consumer watchdog. They want to weaken it. Well that makes no sense at all.”

Now that the bureau has a director, it will assume its full authority under Dodd-Frank, which includes oversight authority over non-bank financial institutions. In the five-and-a-half months since the bureau opened its doors, mortgage servicers, debt collectors, and payday lenders have been outside of its purview. Now, these and other non-banks will likely be subject to regulatory and enforcement actions by the CFPB.

While many Democrats are claiming victory, all signs suggest that the battle is just beginning for Cordray. Many Republicans are already threatening court challenges, and Rep. Patrick McHenry, Chairman of the House Financial Services Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs wrote to Cordray today, requesting that he testify before the Subcommittee on January 24th.

This will not be the first time a presidential recess appointment has ended up in a courtroom. In 1921, the attorney general, at the request of the president, held that recess appointments could be made during an almost month-long recess, but noted that recess appointments during short recesses are unconstitutional finding that “ the term ‘recess’ must be given a ‘practical construction.’”

According to a report released by the Congressional Research Service last month, no recess appointments have been made in recent history during recesses lasting fewer than 10 days. During the Clinton Administration, the Department of Justice argued that any recess longer than three days meets the Constitutional standard for recess appointments. The DOJ did not claim that a recess appointment made in a recess of three days or less is unconstitutional, rather, only that it would present a “closer question.” It remains to be seen who will bring the suit, though there are undoubtedly a number of third parties that have a vested interest in the issues.

Senate Democrats were vocal opponents of recess appointments during the George W. Bush Administration. When President Bush recess appointed John Bolton as Ambassador to the United Nations, then-Senator Barack Obama (D-IL) said that a recess appointment was “the wrong thing to do,” and added that a recess appointee is “damaged goods… somebody who couldn't get through a nomination in the Senate. And I think that that means that we will have less credibility...” Also during the Bush Administration, Senate Majority Leader Harry Reid called recess appointments “mischievous” and “an end run around the Senate and the Constitution.” Now that the tables have turned, Senate Republicans have several of their Democrat colleagues on the record making similar comments. 

The Senate failed to confirm Cordray on December 8, 2011, when it voted 53-45 to end the filibuster and proceed with the confirmation, falling short of the 60 votes needed to proceed. All but two Republicans voted to sustain the filibuster. Sen. Scott Brown (R-MA) is the only Republican Senator to publicly support Cordray, likely because he finds himself in a tight Senate race against CFPB architect Elizabeth Warren. Sen. Olympia Snowe (R-ME), who was one of only three Republicans to vote for Dodd-Frank, voted “present.”

Forty-Five Republican Senators signed onto a letter vowing to oppose any nominee for director until the CFPB is restructured. Specific reforms suggested in the letter were: (1) the establishment of a board of directors; (2) the requirement that the CFPB submit a budget request and go through the appropriations process just like the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Trade Commission; and (3) the oversight of CFPB regulations by Federal bank regulators to ensure that such regulations do not needlessly cause bank failures.

Members on both sides of the aisle issued strongly-worded statements on the president’s move:

Senate Minority Leader Mitch McConnell (R-KY), who has led the Republican effort to block the confirmation, blasted President Obama’s decision, accusing him of “arrogantly circumventing the American people with an unprecedented ‘recess appointment’ of an unaccountable czar.” McConnell described the historical precedent of limiting recess appointments to recesses lasting ten days or more and said “breaking from this precedent lands this appointee in uncertain legal territory, threatens the confirmation process and fundamentally endangers the Congress’s role in providing a check on the excesses of the executive branch.”

Senate Majority Leader Harry Reid (D-NV) said, “I support President Obama’s decision to make sure that in these tough economic times, middle-class families in Nevada and across the country will have the advocate they deserve to fight on their behalf against the reckless practices that denied so many their economic security… I hope that moving forward, Republicans will work with Democrats to address the concerns of middle-class Americans, instead of turning every issue into a partisan fight.”

House Speaker John Boehner (R-OH) issued a statement calling the move “an extraordinary and entirely unprecedented power grab by President Obama that defies centuries of practice and the legal advice of his own Justice Department," Boehner said. “This action goes beyond the President’s authority, and I expect the courts will find the appointment to be illegitimate.”

Senate Banking Committee Chairman Tim Johnson (D-SD) said, “With Richard Cordray leading the Consumer Financial Protection Bureau, Americans will finally get the consumer protections they deserve. Mr. Cordray is eminently qualified for the job, as even my Senate Republican colleagues have acknowledged…It’s disappointing that Senate Republicans denied him an up-or-down vote, especially when it’s clear he had the support of a majority of the Senate.”

House Financial Services Committee Chairman Spencer Bachus (R-AL) said, “The President’s unprecedented decision to attempt to circumvent the Constitution and ignore the law he himself signed is the clearest indication yet that he has abandoned any effort to work in a bipartisan manner to strengthen accountability and oversight of this new government bureaucracy… In doing so, President Obama has delegitimized the CFPB and has opened the agency up to legitimate legal challenges that will cripple it for years. The greatest threat to our economy right now is uncertainty, and the President just guaranteed there will be even more uncertainty.”

Frank's Farewell and His Potential Successors

Rep. Barney Frank (D-MA), Ranking Member of the House Financial Services Committee, Father of Financial Regulatory Reform, and 16-term Congressman announced today that he will not be seeking re-election in 2012. Regardless of politics, few can deny that Rep. Frank has been a giant in the U.S. Congress, particularly in the financial sector, and that he will leave enormous shoes to fill. Within hours of the announcement, rumors began to circulate as to which Democrat will assume his prized seat on the financial services committee. Here are the top contenders:

Rep. Maxine Waters (D-CA):

Rep. Waters, the second most senior Democrat on the committee, is believed by many to be the top choice, and sources say she wasted no time this afternoon before lobbying Members for support. Now in her 11th term in Congress, Waters is the Ranking Member of the powerful Subcommittee on Capital Markets and Government-Sponsored Enterprises and has chaired the Congressional Black Caucus. While Waters is the heir apparent, there may be obstacles in her way. She is currently under investigation by the House ethics committee for three alleged violations. The investigation will certainly continue into 2012. If the committee finds she violated House rules and/or refers her case to the Justice Department, her chances for committee leadership may diminish.

Rep. Carolyn Maloney (D-NY):

Rep. Maloney is next in line after Waters and will certainly rise in influence following Rep. Frank’s departure. Elected in 1993, Maloney has a long history as an active, comparatively moderate member of the committee, and also has ties to the home of the nation’s financial sector. Rep. Maloney has chaired the Joint Economic Committee as well as the House Financial Services Subcommittee on Financial Institutions and Consumer Credit. She was also the author of the Credit Card Accountability, Responsibility and Disclosure Act, also known as the “Credit Card Bill of Rights,” and has been called “the best friend a credit card user ever had.” Given the controversy surrounding Waters and industry’s potential preference for a more moderate voice, some speculate that Maloney could surpass Waters and take the top spot.

The speculation will certainly continue throughout the coming year, but no definitive answer will come until the 113th Congress is sworn in in 2013.

So Long, Supercommittee

Well, at least they didn’t drag it out over Thanksgiving.

Shortly before 5 p.m. on November 21, 2011, Supercommittee Co-Chairs Sen. Patty Murray (D-WA) and Rep. Jeb Hensarling (R-TX) released a joint statement telling the world what it already knew: it was all over. While many had hoped for the sort last-minute compromise we have come to expect from this Congress, this time it just wasn’t in the cards. While the blame game is sure to continue for months (likely all 12 months between now and Election 2012), we turn our attention to what could happen next.

Option 1: Sequestration

It was supposed to be a deterrent, a fate so unthinkable it would force the Supercommittee into action. Now, it may become reality. Under the terms of the debt ceiling agreement, across-the-board spending cuts will be automatically triggered that will equal the $1.2 trillion in savings the Supercommittee failed to create. The first automatic cuts are split equally between security and non-security spending and are set to take effect on January 2, 2013. Security funding includes the Department of Dense, the Department of Energy nuclear-weapons related activities and the National Nuclear Security Administration, among other agencies. Security spending would be capped at $546 billion in FY 2013 and at $556 billion in FY 2014. All other non-security funding—including military construction, Veterans Affairs and Homeland Security funding—would be capped at $501 billion in fiscal 2013 and $510 billion in fiscal 2014. Under sequestration, Medicare will face limited cuts, but Social Security, Medicaid, veterans and civil and military pay, funding for the wars in Iraq and Afghanistan and overseas contingency operations will be excluded entirely.

Option 2: New Supers Save the Day?

We saw the Supercommittee and even heard whispers of a Super-duper committee for a while, but after a long and unsuccessful history of Domenici-Rivlins, Simpson-Bowleses, and now Murray-Hensarlings, it begs the question – Is anyone really going to be willing to take up this losing battle anytime soon? Senate Majority Whip Dick Durbin (D-IL) thinks so. Sen. Durbin suggested this morning that any bipartisan group of 12 senators could produce a “super” deficit reduction plan and bring it to the Senate floor for a vote. “It’s time to move to the committee of the whole. Let’s start moving beyond these special committees and let’s do something pretty basic and maybe radical,” said Durbin.

Option 3: Back to the Beginning

Before the Supercommittee even had a chance to fail yesterday, Republicans launched an assault against sequestration. Both Sen. John McCain (R-AZ) and former Massachusetts Gov. Mitt Romney went on the offensive against defense cuts. In a statement released yesterday, “We are now working on a plan to minimize the impact of sequestration on the Department of Defense and to ensure that any cuts do not leave us with a hollow military,” said Sens. McCain and Lindsey Graham (R-S.C.). “The first responsibility of any government is to provide for the common defense; we will pursue all options to make certain that we continue to fulfill that solemn commitment.” Romney echoed their sentiment, calling for the $600 billion in proposed defense cuts to be shifted to other parts of the federal budget. President Obama has vowed to veto any effort to prevent sequestration.